Matteo Benetton, University of California-Berkeley
Benjamin Hebert, Stanford University
Timothy McQuade, University of California-Berkeley
Abstract: We study competition and pass-through in the market for retail deposits. Federal funds rate increases are associated with only minimal increases in deposit rates. Leveraging new data on offers mailed by banks to households, we show that federal funds rate increases are strongly associated with changes in mail volumes, sign-up bonuses, and offers targeting new customers. These margins and not deposit rates are the primary ways in which interest rate changes affect the deposit market. We rationalize the use of these margins and not deposit rates in a simple model with active and sleepy depositors. Our model implies that the marginal value of a new depositor is insensitive to interest rates and that depositor heterogeneity and adverse selection, as opposed to market power, are the primary reasons why banks offer far less than the full present value of future rate spreads to depositors.
Discussant: Nathaniel Pancost, University of Texas-Austin
Yevhenii Usenko, Massachusetts Institute of Technology
Abstract: Recent work documents widespread depositor stickiness, yet deposit flows respond strongly to monetary policy. Using data on U.S. commercial banks since 1975, I show that the deposits channel operates primarily through a small number of large, responsive depositors who account for a substantial share of bank funding. I document that rates on large deposits are significantly more sensitive to policy rates—with pass-through more than double that of small deposits. Still, large deposits flow out more strongly in response to monetary policy shocks and account for essentially all aggregate deposit outflows. These patterns are not explained by local deposit market concentration. I show that the outflows of large deposits lead to lower lending, particularly at small banks. My results suggest that as the share of large, responsive deposits rises, the deposits channel is likely to become stronger.
Abstract: Banks' deposit market power is customer-specific: depositors who hold stocks, bonds, or investment fund shares (market-priced savings, MPS) have stronger outside options and therefore more elastic deposit demand. Using Danish administrative data linking the universe of deposit accounts to each depositor's complete investment portfolio, we show that banks price this elasticity: MPS holders receive a 6.6 bps larger deposit-rate increase per 100 bps policy-rate increase than comparable non-holders at the same bank in the same year. The premium opens when depositors acquire MPS and fades when they sell these assets. Inheritances following unexpected parental deaths provide exogenous variation: heirs who inherit stocks or bonds see pass-through rise 3 to 6 pp relative to heirs inheriting cash or real estate. Higher pass-through only partially offsets MPS holders' greater elasticity: per 100 bps of tightening, they reduce deposits 2.4 pp more, and the resulting funding pressure leads high-MPS banks to cut lending.
